With financial markets in turmoil and economic growth slowing, policymakers around the world may once again be forced to co-operate to try to head off a crisis, as they did successfully in 2008 and 2009. But this time they have fewer good options.
Central banks have less room to ease monetary policy than they did three years ago; cash-strapped governments cannot afford to lift spending as much; and political disarray in some countries make concerted global policymaking harder.
“What can you do? On monetary policy, clearly no one agrees with anyone. On fiscal policy, everyone is blocked,” Deutsche Bank economist Gilles Moec said.
By some measures, the global situation is not nearly as bad as it was in 2008.
Banks have strengthened themselves since the collapse of Lehman Brothers and the world is still far from a recession; JP Morgan may have cut its forecast for 2012 US growth this week but it still expects an expansion of 1 percent.
Global stocks fell nearly 10 percent in the last month but MSCI’s world equity index is 90 percent above its 2009 low.
“I know people are saying that this feels very much like 2008, but I don’t think we are there. In 2008, you could point at the problem in the banking sector and there were failed banks,” Nomura economist Jens Sondergaard said.
Still, the trends have clearly turned negative. National purchasing managers’ indices around the world have dropped near or below the “boom or bust” threshold separating economic growth from contraction. This week’s slide of British government bond yields to record lows underlines both investor nervousness and a grim growth outlook.
In some ways, the situation is more worrying than it was in 2008. There is widespread concern about the risk of a downgrade of the US sovereign credit rating, and a bond market attack on Italy, the euro zone’s third-biggest economy, has called into question the long-term viability of the zone. Valuations of US and European bank shares are back around levels hit at the time of Lehman’s collapse.
“The difference (between 2008 and now) is that this is not only a currency and banking crisis, you have now a currency, banking and sovereign crisis,” analyst Sylvain Broyer said.
The Swiss central bank’s shock decision to cut interest rates on Wednesday to fight the rapid appreciation of the Swiss franc was seen by some analysts as a possible precursor to concerted efforts by central banks in the Group of 20 (G20) nations to stabilise markets.
Steen Jakobsen, the chief economist at European investment bank Saxo Bank, said the G20 nations were likely for now to leave it up to their central banks, which could act relatively flexibly and quickly, to handle market turmoil.
But if the economic climate keeps worsening, perhaps with another 10 percent fall by global stocks, G20 governments may be pushed into making a concerted pledge of action to protect markets and growth, as they did at a London summit in April 2009, he said.
By displaying solidarity among world leaders and promising $1.1 trillion (R7.6 trillion) for global lending institutions and trade financing, the London summit succeeded in reassuring investors enough to support a recovery in markets and economic growth.
Now, however, it may be harder for governments to show such solidarity. US President Barack Obama has been weakened politically, and his economic policy options narrowed, by his battle to push up the US debt ceiling.
Some big countries are further along in their election cycles, complicating decisions.
During the 2008-2009 crisis, the International Monetary Fund played a major role in co-ordinating the global response, but there are now signs of internal division, with powerful emerging economies criticising the policies of Western governments.
These tensions may complicate G20 agreements on action in several areas, which include:
l Joint currency intervention. This is the most likely initial form of G20 co-operation because well-tried mechanisms for it already exist; central banks could send a message that they want stability in markets by intervening massively to stop appreciation of the Swiss franc or Japanese yen. But China and the rest of the world are still far from agreeing on a more fundamental problem in the global currency system – the value of the Chinese yuan.
l Co-ordinated interest rate cuts. In October 2008, six Western central banks cut interest rates in a co-ordinated move, while China also eased policy. Global central bankers may signal an easier policy bias when they meet in Jackson Hole in the US from August 25 to 27. But co-ordinated rate cuts look unlikely in the foreseeable future because some central banks such as the US Federal Reserve have very little room left to cut.
And central banks are also at different stages in their monetary cycles. During the 2008-2009 crisis, the G20 did not resolve differences over fiscal policy; Germany resisted US pressure to boost government spending more.
But the London summit in 2009 still produced a pledge of “an unprecedented and concerted fiscal expansion” by G20 states, which cheered markets.
Such a pledge is extremely unlikely now. – Reuters